Banking Law

Question 1

What can banks do with the funds they gain? What are the rules surrounding this?

Answer 1

Banks are able to lend the funds between eachother using LIBOR (London inter-bank lending rate)

Retail banks make a profit by balancing the interest they pay out with the interest they receive on mortgages etc.

Question 2

What happens if a bank goes insolvent?

Answer 2

Account holders are ranked as unsecured creditors so would only receive pennies in the pound.

This is why there are bank runs when banks look like collapsing (Northern Rock).

The FSC will insure account holders up to £75,000 (£150,000 for joint accounts).

Question 3

What might banks do exceptionally?

Answer 3

Hold money on trust for fund managers - a trustee/beneficiary relationship.

Question 4

Why is LIBOR important?

Answer 4

Some $300tr of contracts reference LIBOR.

Barclays was fined £290mn for fixing LIBOR rates.

LIBOR is now calculated by ICE and regulated by the FCA.

Question 5

What is the most important term surrounding the bank-account holder relationship?

Answer 5

Tournier - Confidentiality - banks cannot divulge any customer information, not even on past accounts.

Norwich Pharmacal - banks can be ordered by court to provide information on the accounts of fraudsters.

Turner v RBS - customers can expressly/impliedly waive confidentiality.

In syndicated loans, banks can waive their right to confidentiality by assigning their loans to other financial institutions.

Question 6

Which two recent acts help keep banks in check?

Answer 6

Proceeds of Crime Act 2009 - guards against money-laundering.

Payment Services Regulations 2009 - banks must explain and remedy unauthorised transactions.

Question 7

Mann’s State Theory of Money 1:

Answer 7

1. All chattels

Question 8

Mann’s State Theory of Money 2:

Answer 8

2: Issued by the authority of the law.

Question 9

Mann’s State Theory of Money 3:

Answer 9

3: Denominated with reference to a unit of account.

Question 10

Mann’s State Theory of Money 4:

Answer 10

4: Meant to serve as a universal means of exchange.

Question 11

Mann’s State Theory of Money 5:

Answer 11

5: In the state of issue.

Question 12

What two other theories of money might be more useful?

Answer 12

Social Theory of Money - money is what users say and make of it i.e. Bitcoin.

Commodity Theory of Money - forms of money (old/commemorative coins) can be sold on as a commodity.

Question 13

Does Mann’s Theory still hold weigh?

Answer 13

Not really, bank money certainly is not a chattel.

New forms of currency can be used across borders and issued by bodies other than law.

Notes and coins represent a claim against the Bank of England - they are promissory notes.

Question 14

How are physical money and bank money similar?

Answer 14

Goode:
1. Both represent good title to the money.

2. The transfer of both must be unconditional to achieve payment.
3. Both forms of payment are final.
   * Both settle monetary obligations with identical legal effect.

Question 15

Fraudulent Payments?

Answer 15

These do not count as theft following R v Preddy.

Question 16

Is e-money as good as money?

Answer 16

Yes according to Goode, it resembles payment by way of funds transfer.

1. The retailer receives immediate credit.
2. The transfer is unconditional and final.
3. It can be accepted without reference to the creditworthiness of the holder.

Question 17

Why is fintech money important?

Answer 17

BlockChain can replace the clearing system.

Mobile payment systems give people in LEDCs with poor bank branch access/coverage to make use of money in new ways.

Question 18

What is the importance of payment? Where has the case law come from and what has been problematic?

Answer 18

Miller - nothing kills financial markets faster than not knowing when you are going to be paid.

Charterhires in shipping law have been important due to their volatility and the prevalence of bad bargains.

Bamford - Libyan Arab Foreign Bank - the current clearing system is susceptible to interruption - could be changed using BlockChain

Question 19

Discuss the date of payment term.

Answer 19

Date of payment is an innominate term, not a condition,

Following Spar Shipping,

And The Brimnes,

Rejecting The Astra.

Question 20

Why isn’t payment date a condition? How can parties get around this?

Answer 20

There would be too many bad faith breaches.

Inserting a ‘time is of the essence clause’ (or termination clause) can allow parties to terminate for breach of this term.

Question 21

What other cases are important for payment?

Answer 21

The Chikuma - payment must be unconditional i.e. the funds must be accessible on the date without penalty or incumbrance.

The Laconia - banks cannot waive late payment, even if the payment date is a non-banking day i.e. Sunday.

Question 22

What options are available for managing risk in international contracts?

Answer 22

• Placing a charge over the goods.
• Liquidated damages for breach.
• Interest on late payment
• Letters of Credit.

Question 23

Give an introduction to Letters of Credit.

Answer 23

‘The Lifeblood of International Commerce’ - Rix J in Czarnikow-Rionda.

An irrevocable arrangement which constitutes a definite undertaking of the issuing bank to honour a complying presentation of documents - UCP 600 (governing rules).

An independent payment obligation separate from the underlying contract.

Incredibly useful for where there is mutual suspicion between parties which have not dealt with eachother before.

Question 24

What documents might be stipulated?

Answer 24

1. Certificates of authenticity.
2. Insurance certificates/guarantees.
3. Bills of lading.

Question 25

What does the principle of autonomy mean?

Answer 25

Article 4 UCP 600 - the LC is an independent payment obligation.

It is autonomous from the underlying contract.

Payment by a solvent entity can still be due even if there is a breach of the supply contract.

Question 26

What is Strict Compliance? What are two key cases on it?

Answer 26

Article 14 UCP 600/Denning in Edward Owen - documents must comply on their face.

As long as the documents seem fine, the bank is not liable for their status - Article 34 UCP 600.

Any discrepancy from the terms of the LC and the bank can refuse to pay;

JH Rayner v Hambro’s Bank - LC for coromandel groundnuts but document stipulated machine-pressed groundnut kernels - the same thing in the trade but the bank could still reject.

Bulgrains - an ‘&’ was missing from the name on a document so the bank could refuse to pay.

Question 27

What is the only exception to strict compliance?

Answer 27

United City Merchants - fraud - Lord Diplock - ‘Fraud unravels all’

English law favours certainty over anything short of serious and obvious fraud - ‘pay now, argue later’.

The fraud must be by the seller or their agent.

Even if the allegations are quite convincing the bank must still pay - Czarnikow-Rionda.

Injunctions are almost never granted.

Question 28

What is the situation surrounding illegality?

Answer 28

Staughton LJ raised the argument for an illegality exception in Josi.

This could have been picked up in Mahonia but it was not.

Certainty for the bank is more important.

Question 29

Explain the nullity argument.

Answer 29

Nullity was rejected in UCM and then Montrod, and many commentators disagree with its rejection.

Singapore adopted the nullity exception in Beam Technology.

Goode, Hooley and Bridge all support the exception.

A forged signature represents a nullity but a cheque with a forged signature would be invalid outright.

Forgeries and ‘phantom shipments’ can pass through the system without being challenged - Bridge thinks this is stupid.

Andrews/Millett - LCs are direct substitutes for cash, but forged cash and cheques would not represent good payment so why should nullities be allowed?

Question 30

What other example does Bridge give?

Answer 30

A false bill of lading can be accepted by a bank simply because it says ‘bill of lading’ on it.

The shipment may not even be real but the bank will still pay.

This is stupid.

Question 31

What is the relationship between banks and account holders? What does this mean?

Answer 31

Foley v Hill - debtor/creditor relationship as a result of the contract between bank and customer.

Ownership in the money passes from the customer to the bank in return for a debt chose in action.

Therefore we don’t strictly pay in/withdraw money, we increase or diminish the bank’s debt to us.